Too Many Change Orders May Provide
The Basis For Abandoning The Construction Contract
William C Last, Jr.
It is highly unlikely that a construction project will not be completed without the contractor asserting a claim for additional compensation for work that is outside the scope of the contract, construction plans and specifications. However, on some projects the number and extent of change orders are well in excess of what the parties contemplated when they entered into the construction contract.
While the majority of construction contracts include clauses that establish how change orders will be documented and paid for by the owner, they typically do not include a method for fairly compensating the contractor when there are excessive change orders. A great number of other states and the federal government have developed the doctrine of a cardinal change. Generally, a cardinal change occurs when the contractor is required to perform work that is of such a nature, quantity and/or impact that is dramatically beyond the type of changes the parties contemplated when they entered into the contract. Unfortunately, it is difficult to determine exactly when a cardinal change occurs.
In a recent case entitled Amelco Electric V. City of Thousand Oaks the California appellate court addressed the issue of cardinal changes. The Amelco Court also addressed other key issues that will impact other lawsuits that are brought by contractors against public entities.
California courts have recognized that the doctrine of abandonment is applicable when there are an excessive number of change orders. As the Amelco Court recently observed: "The word 'abandonment' is a word of art in the context of construction contracts. In this context, it does not mean that the parties thereto sever their rights and responsibilities....[W]hen the owner imposes upon the contractor an excessive number of changes such that it can fairly be said that the scope of the work under the original contract has been altered, an abandonment of contract properly may be found. [Citations.] In these cases, the contractor, with the full approval and expectation of the owner, may complete the project. [Citation.] Although the contract may be abandoned, the work is not." Under such circumstances, the Amelco Court found that prior cases allow for a contractor to recover for the reasonable value of the work.
While the Amelco Court is the first appellate court to apply the abandonment doctrine to public works contracts, it unfortunately failed to provide a clear cut definition as to when abandonment does or does not occur. In the Amelco case it was clear that abandonment occurred. For example, during the two-year construction process, over 1,018 sketches to clarify or change the original contract drawings resulted in an additional 32 change orders. As a result, the electrical contractor's contract, by agreement, was increased by nearly 17 percent. The contractor's expert testified that, in essence, the whole electrical design was changed from its original design.
The egregious nature of the excessive change orders in the Amelco decisions makes the application of the abandonment doctrine easy, but most excessive construction change order cases are not so clear. But the problem that most contractors will face is balancing a contractor's desire to obtain the greatest amount possible for any additional work while avoiding the public body's response that the contractor has submitted a false claim. Thus, the Amelco Court has not provided a safe harbor.
The Amelco case is also significant for the other hot issues that opinion addresses. The other issues that will impact the construction industry include: (a) whether or not the failure to follow contract change order procedures bars a recovery of the value of additional work; (b) whether or not the "total cost" approach for measuring damages for an abandonment doctrine claim; and (c) whether or not a statutory lien release form constitutes a waiver of claims for additional work.
Most construction contracts require the contractor to provide a written notice as a prerequisite for making a change order claim. It is not uncommon that during the course of construction that the requirement will be waived or ignored by one or both parties. The Amelco Court held that such a notice is unnecessary when the other party caused the breach of contract that resulted in the additional work. This aspect of the opinion, on its own, represents a significant victory for contractors.
The "total cost" method for calculating damages is basically a quantum meruit measure of damages. Quite simply, the "total cost" method allows the contractor to recover the total actual costs of the work performed. However, the "total cost" method has been criticized in other jurisdictions for failing to take into consideration errors made by the contractor that increased the total cost of the work. As a result, those jurisdictions have allowed a modified versions of the "total cost" method that is intended to factor out contractor caused cost overruns. The Amelco Court brushed aside those concerns and found that is applicable when there is an abandonment of the contract.
Finally, while the impact of statutory lien release forms (see Civil Code section 3262) on construction change order claims has been treated as a given, the Amelco decision makes it unequivocally clear that the statutory lien release language only releases a contractor's right to assert a lien and not the right to later assert a claim for the additional work
If you are confronted with an excessive number of change orders and extra work demands, it is recommended that you: (a) notify the owner, in writing, that they are excessive, (b) attempt to notify the owner of each new proposed change order and reserve your right to later assert a claim for the cumulative impact of the additional work, and (c) document the impact that the excessive changes have on the completion and cost of the project. In closing, the Amelco decision is a win for the construction industry.
This article, ©2000, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.